House GOP advances new plan for SC income taxes that has fewer paying more

Yahoo

30-04-2025

House Ways and Means Chairman Bruce Bannister, R-Greenville, announces the GOP income tax reform legislation surrounded by House and Senate Republicans at the South Carolina Statehouse in Columbia on Tuesday, March 25, 2025. A new proposal April 30, 2025, would raise income taxes for fewer people than the original. (Photo by Travis Bell/STATEHOUSE CAROLINA/Special to the SC Daily Gazette)
COLUMBIA — A tax restructuring plan that would increase income taxes for about a quarter of South Carolina filers and cut them for more than 40% advanced Wednesday in the House.
While the plan is expected to clear the House in the session's waning days, the Senate's highly unlikely to take it up. That means the only change in the tax code this year will be a state budget that shaves $290 million in revenue — fulfilling the final cut of a 2022 law.
Tax change impacts
In the first year of the proposed change, the shift in liability would cause:
42% of tax filers to pay, on average, $488 less
24% of filers to pay, on average, $266 more
33% of filers to see no change
Source: S.C. Revenue and Fiscal Affairs Office
House Republicans hope sending the tax restructuring plan over to the Senate next week will enable it to reach Gov. Henry McMaster's desk early in 2026 — in time to be included in the next budget process.
Republicans have long wanted to reduce the state's top marginal rate to make South Carolina appear more competitive. With the soon-to-be 6% rate still the Southeast's highest — even though the effective rate is about half that — Republicans contend the state needs to bring it down to keep attracting companies and their executives.
The House's chief budget writer said it's about removing the 'sticker shock' for businesses.
'We looked out of line with the way we treat our actual tax base,' said Ways and Means Chairman Bruce Bannister.
But Democrats question the need altogether, noting the existing tax structure hasn't hindered South Carolina from being one of the nation's fastest-growing states.
'If we are competing for people, we are certainly winning,' said House Minority Leader Todd Rutherford, D-Columbia. 'The question then lies, who is it that we are competing for that we're not winning? And why is it that we're not winning?'
The proposal approved Wednesday by the House Ways and Means Committee on a mostly party-line 17-6 vote is very different from what was initially announced a month ago by GOP lawmakers with much fanfare. After an analysis showed 60% of tax filers would pay more, the pushback prompted House Republicans to put their bill on hold and ask the state's fiscal experts for a review of options.
'When you get resistance like that, you pack up and try a different path,' said Bannister, R-Greenville.
The new plan selected by his committee no longer moves immediately to a single, flat tax rate (which the bill did as introduced). Rather, it collapses the state's three tax rates into two — eliminating the bottom rate, which resulted in zero taxes paid, and reducing the top two tiers.
Another reason Republicans give for restructuring the tax code is that it results in 44% of tax filers paying zero state income taxes. Meanwhile, 10% of filers pay for 65% of the state's total income tax collections.
Republicans say that's inherently unfair.
'Let's have a larger percentage of people paying, and let's lower the burden on everybody,' Bannister said.
Under the changes advanced Wednesday, more than one third of tax filers would still pay zero income taxes.
As the original bill did, the amended version would decouple South Carolina's income tax code from the federal system.
By being one of just five states to tax 'federal taxable income,' South Carolinians start their state tax forms with less income to tax, compared to what they'd file if they lived across the state border.
Taxing adjusted gross income as most states do would make South Carolina's taxes truly comparable to its neighbors. Republicans contend it would also put South Carolina back in control of state tax collections, instead of being tied to the whims of Washington politics.
Under the proposed two-tier plan, taxpayers would pay 1.99% on the first $30,000 of their taxable income, after all applicable state exemptions and deductions are taken. Every dollar after that would be taxed at 5.39%.
The plan would reduce tax collections overall by $400 million in year one — almost double what the initial bill would have done.
Republicans said that will only reduce anticipated increases in revenues. They contend no cut in state services would be necessary.
The plan calls for eventually reaching a single tax rate of 1.99%. Potential annual cuts would depend on estimated income tax collections rising by at least 5%. Doing so slowly rather than all at once is expected to cause less of a tax shift.
It's impossible to make structural changes to the tax code without creating winners and losers, said Frank Rainwater, director of the state Revenue and Fiscal Affairs Office, which makes the revenue projections legislators use in crafting a state budget.
'There's a consequence for every action you make,' Rainwater told the committee.
The bill still calls to eventually eliminate income taxes at some point.
Members of the uber-conservative Freedom Caucus have called for immediately eliminating income taxes. But that would require slashing state spending by nearly half.
Last fiscal year, income tax collections totaled $6.1 billion, accounting for nearly 45% of the state's general fund revenues, according to the state's fiscal experts.
Rep. Brandon Newton, chairman of Ways and Means' tax policy subcommittee, said phasing in cuts based on projected revenue increases will avoid cutting essential services.
'This is, in my mind, a responsible way to get rid of the income tax and, in reality, the only rational way to get rid of the income tax,' said the Lancaster Republican.
Of the seven Democrats who sit on the Ways and Means Committee, only one voted to advance the plan: Rep. Leon Stavrinakis of Charleston, who chairs the economic development subcommittee.
Rep. Gilda Cobb-Hunter, the longest-serving legislator in the House, said if the state's tax code is really making business executives hesitant about locating here, then the problem might be marketing, not the tax structure itself.
She cautioned against pushing through a major change that might result in unintended consequences.
'I just think there are a lot of implications that we may or may not be thinking about,' said the Orangeburg Democrat, who's also first vice chair of Ways and Means.
She again pointed to the state's last huge tax swap as a cautionary example.
The 2006 law known by its number, Act 388, increased the state sales tax by a penny on the dollar to reduce homeowners' property taxes, creating a host of unintended consequences for real estate, business property taxes, and school district budgets that Cobb-Hunter said they're still feeling two decades later.